A Primer on US Inflation Rates

In his column on Monday, Sean talked about an important subject that I don’t know enough about: how the government handles inflation.

Let me start with this…

What I Do Know 

I know that inflation, in simplest terms, is the phenomenon of currencies losing value over time. Thus, if one is speaking about the inflation rate of the US (or any other) economy, one usually speaks about the average increase of the costs of everything purchased in that economy over a given period of time.

This is the chart that Sean presented on Monday:

It shows that the overall average inflation rate in the US from March 2023 to March 2024 was 3.5%. And as you can see, it is a number that is comprised of any number of inflation rates of different things bought and sold in the US economy. It includes motor vehicle insurance (which went up 22% in that 12-month period), housing (which increased by 4.7%), the cost of eating out (4%), energy (2.1%), and items like televisions, airline fares, and smartphones, all of whose prices decreased (deflated) during that same period.

In his commentary about the chart, Sean pointed out that a number of the items that had the highest inflation rates were related to the fact that in 2020/2021 there was a surge in Americans buying used (rather than new) cars, and this pushed the overall rate higher than it would have been otherwise. And since that trend was tied to specific events and not likely to last, he noted that there should be a correction in the cost of used-car-related expenses, and that the “deflation” in that market will likely result in lower overall inflation rates in 2024.

The Role of the Federal Reserve in All This 

The Federal Reserve – the central bank of the United States – is a group made up of seven men appointed by the president and confirmed by the Senate. Their primary job is to do their best to stabilize the US financial markets and keep them healthy – partly through regulations, but mostly by controlling the amount of money flowing through the economy. The main way they do that is by setting the rate at which banks and other financial institutions can borrow money from each other’s excess reserves overnight.

When the Fed’s rate is low, it is cheaper and more enticing for businesses and banks to borrow money. This supply of “cheap” money tends to stimulate the economy because lower interest rates make it more attractive for entrepreneurs to start new companies, for existing companies to increase the products and services they sell, and for the potential consumers of those products and services to buy more.

Stimulating the Economy by Lowering Interest Rates Is a Generally Good Idea, but… 

There is a negative side effect of cheap money rates. And that is because of the relationship between the Federal Reserve (the Fed) and the US Treasury Department.

The Fed is just a group of presumably smart people sitting around a table, discussing dozens of factors and forces at play in the financial and business markets, and coming to agreement now and then about how much the government should charge for lending out its “money.”

The Fed has no money of its own. It is the US Treasury that has the money. But the Treasury doesn’t have all the money it needs to write checks for the tens of billions of dollars that the US government spends every year. It must cover the shortfalls by selling Treasury bonds and bills – i.e., government-backed promises to return the money it borrows with interest – to whoever is willing to buy them.

In the past, the primary customers of these promises (the primary buyers of US debt) were big, rich, profitable countries like Germany and Japan. Originally, the idea of this whole scheme was for it to be a temporary solution to a passing and pressing need – like the money needed to fight the Civil War. The idea was that this debt was going to be temporary. It would be repaid to the T-bond and T-bill holders with tax revenues. And to prevent the value of those dollars from being deflated over time, their value was officially tied to gold – gold that the government held in vaults around the country (like Fort Knox).

But that didn’t happen. The government found out that voters weren’t willing to have their taxes (and especially their income taxes) raised every time the government decided to go to war or fly a rocket to the moon or give aid to Haiti. The pols realized that if they wanted to get reelected to their cushy jobs, they had to promise to keep taxes down for the people and companies in their district.

So, that’s one big thing that happened. Despite the best hopes of those that created our taxing systems in order to fund their dreams of improving their world, there was from the get-go a growing gap between how much our legislators wanted to spend on their projects and how much gold-backed money the US Treasury had access to.

The battle between the conservative idea of spending no more than you have versus the liberal idea of borrowing money to pay for what you spend was lost – with the majority of politicians on both sides of the aisle realizing that if the Treasury Department could keep selling T-bonds and T-bills – i.e., if it could find governments and hedge funds to keep buying US debt – they could have their cake and eat it too.

There was, however, a limit to how many dollars they could lend out. And the limit was that each dollar was legally “tied to” the value of gold. By connecting dollars to the gold that the government had in its coffers, there was a limit to how large US debt could become.

This all changed in 1971, when President Nixon (supposedly a conservative) ended the convertibility of dollars to gold.Now, there was no natural limit to how many dollars the US could borrow. US debt was effectively unleashed from the anchor it had been tied to – the value of gold that the Treasury held – and that was the starting gun for a stampede of federal spending that brought US debt from $398 billion, when Nixon issued the directive, to nearly $35 trillion today!

Hold that thought while I get back to the Fed and inflation…

What happens in DC each year is that our legislators vote for a wide range of proposals, propositions, and projects to fund wars, build highways, help out single-parent families and homeless folks, fight drug addiction, bail out billion-dollar banks, and help victims of disasters in the US and all over the rest of world. And that makes them, and their constituents, feel like they are doing the right thing.

Of course, these projects, however needed or well-meaning, cost money. A gargantuan amount of money. Much more than our government has in its coffers. To pay for these programs we can’t afford, we call upon the services of the US Treasuryto bring in enough money to cover the shortfalls.

And this gets us back to inflation.

The Federal Reserve indirectly influences how much interest the Treasury can promise to pay on the T-bonds and T-bills it sells. If it raises those rates, there is less debt sold. When it lowers the rate, there are more buyers.

In essence, what the government is doing by lowering the Fed rate and thus increasing all of this borrowing of dollars that it (i.e., the Treasury) doesn’t have is increasing the amount of debt that the Treasury owes to its lenders (the T-bond and T-bill holders).

In other words, the lower the cost of borrowing dollars, the more IOUs the Treasury must print to satisfy the demand – and thus the more debt the US government will get into.

And getting into a lot of debt is never a good idea.

In 1950, when I born, the total US debt was $257 billion. In 1970, when I finished my sophomore year in college, it was $371 billion. In 2000, it was up to $5.67 trillion. And today, in 2024, it is over $34 trillion, making the US the most in-debt country in the world, more than twice as high as the world’s #2 debtor nation, China (at about $13 trillion). Click here.

How Economies Pay Down Debt 

Now, I’m hardly an expert on economics. I’d call myself an interested amateur, at best. But from all the reading I’ve been doing about economics for the last 30 years, my belief is that there are only three ways an economy can pay down its debt:

1. By a miraculous surge of profitable economic innovation (very rare)

2. By a severe financial recession (like we had in 2001 and 1948 and 1930)

3. Or by a significant and sustained period of inflation.

The first option is extremely rare.

The next two are not just common but become probable once the national debt reaches a certain level. (By any realistic metrics, the US economy is already way past that.)

Back Again to the Fed 

For the past 16 years, the Fed has been working hard to avoid either a financial collapse or a bout of hyperinflation by gradually easing and then tightening the money supply.

When Fed rates are low, banks and businesses are enticed to borrow more money to grow their revenues and profits. When Fed rates are high, the economy tends to slow down because fewer banks and businesses are borrowing money to invest in growing the economy.

So, on the one hand, when the economy is in a slump, the government wants the Fed to lower rates and thus boost spending. On the other hand, when borrowing is very strong, federal, corporate, and even individual debt grows, which makes for the likelihood of rising inflation.

Which gets us back to what Sean was saying in Monday’s column. He’s softly predicting that the Federal Reserve, assuming that there will be a natural decline in inflation due to the factors above, might decide to make one more reduction in the Fed lending rate before the end of the year. And if they do that, it should have a positive, stimulating effect on the economy – but not so much that it would greatly increase inflation.

And if that is true, there is reason to believe that, despite the way US debt keeps piling up, the US stock market (as well as some other US financial markets) may still have several months of growth ahead of them.

That’s what I know – and it’s a lot. But there are some questions about the government’s inflation numbers that I’ve never been able to find the answers to. So, I asked Sean to fill me in…

A Quick Q&A with Sean 

Me: Sean, I am under the impression that the government inflation numbers do not include fuel and food. But they are a significant part of a middle-income family’s expenses. So how does one take account of that?

Sean’s Answer: This is… a nuanced issue. The government uses multiple models and measures of inflation to get an overall sense of price stability, which is their ultimate goal. CPI-U, CPI-W, Core CPI, PCE… the same way one looks at multiple KPIs in a marketing campaign to assess performance, the Fed looks at all of these (mainly PCE) to gauge inflation.

Core CPI does not include food and energy expenses – even though these are consumer staples – because they’re often traded speculatively in the market.

So, for example, you could have a drought, or a surge of futures buying, or a supply chain disruption cause the price of food to rise. But this rise in price doesn’t really reflect a decrease in the purchasing power of the dollar (which is what we’re really trying to assess).

Remember: Measuring the prices of things is a map, not necessarily the territory. Prices can fluctuate without it having anything to do with the stability or intrinsic value of a currency. (Which is a weird thing to say, considering that no money has intrinsic value – but I digress.)

Me: These numbers are reported every year as if they stand in historical isolation. If the inflation rate in one year is 8% and the next year it is 2%, the two-year inflation is 10%, right?

Sean’s Answer: It’s even worse than that. CPI inflation is based on an index – think a list of prices all tallied up and averaged.

If the CPI is 100 at year 0…

Then 108 in year 1… an 8% increase…

What’s 2% above that?

It’s not a CPI of 110 (10% cumulative). It’s 110.2. A 10.16% increase over two years.

Inflation compounds.

So, if we want to get back to a long-established 2% trendline, it’s possible that inflation needs to be under 2% for some time.

A recession could help with that.

Me: Isn’t it then misleading in a way to focus on the one-year rates? Take college tuition, for example. According to your chart, it was small or negative in the period measured. And yet tuition has probably gone up by a factor of 5 to 10 since I was in college. And the cost of a start-up home has gone up dramatically since I bought my first one in 1983. I paid $175,000 for a house that is probably $775,000 today.

Sean’s Answer: You’re absolutely right. And it goes even further than that. Because here’s the truth… ALL inflation data is misleading. The average person’s average experience is rarely ever “average.”

Everyone has their own inflation number. And that number is based on what they spend money on.

I had a conversation with an acquaintance about this the other day. He had been tracking his income and expenses for the last four years, and he showed me a model of the declining value of his income, which has been fixed.

But when I looked at his actual expenses… they were going down! He was spending less money on certain items and activities, but, to his chagrin, I pointed out that he was getting the same value/outcome as he did in 2020.

In other words, I explained to him that his personal inflation number was actually negative. His purchasing power has been going up.

The analyst Lyn Alden talks about this a lot. (She’s a genius.) She states that every household has its own personal Consumer Price Index.

To put it simply…

If you were a hermit who drove the same car since 1970 and only ever purchased women’s blouses and large-screen televisions… the purchasing power of your dollar has actually increased, not decreased.

That’s why, in my column, there’s a subtext of skepticism about headline inflation numbers and people’s perception of them.

Our understanding of inflation is about 100 years old. The notion that we should even strive for 2% inflation was invented by New Zealand on a whim in the late 1980s. We have a lot of different models of inflation because we don’t fully know what the best way to model inflation even is.

Me: Got it! Thanks, Sean!

What I Still Want to Know… 

I came away from that conversation with a much better understanding of this very complicated subject.

Sean’s answers confirmed my belief that inflation is a serious matter and that if the Fed and Treasury make bad choices, inflation is, by definition, a way of lowering the buying power of every dollar and financial asset backed by dollars that I and my family partnership own.

He also helped me understand that some amount of inflation is inevitable and that – whether the number is 2% or some other number – the ultimate and perhaps only way to avoid economic disaster in the future cannot be achieved simply by raising and lowering the Fed’s lending rate, but by demanding that our legislators stop spending hundreds of billions of dollar each year that we don’t have.

Even after processing all of that information, though, I realized that I only half understand as much as I want to understand about inflation. And since I suspect that many of my readers don’t know much more than I do, I think I’m going to have to arrange another conversation with Sean for an upcoming issue.

Check out Sean’s YouTube channel here.

Prioritizing Your Exit Plan 

An increasing number of Americans and Brits believe their home countries are in decline, says Jeff Thomas in this essay from Doug Casey’s International Man. And some of them are wondering if they should have an escape plan.

As a long-time publisher of gloomy economists and public intellectuals, I’ve done my fair share of such thinking. On the one hand, it’s not difficult to convince myself that I live in the safest, most stable, and most prosperous country in the world. On the other hand, when I read and write about some of what is happening today – economically, culturally, and politically – I sometimes feel it would be prudent to have an escape strategy for me and my family.

Well, I do have our home in Nicaragua – an economically impoverished country in Central America run by a self-identifying Communist. It is in a beautiful resort community (Rancho Santana) in a hamlet that is basically unpoliced and two hours from the country’s only first-class hospital. That’s something.

I could make it sound a bit scarier, but the fact is I feel safer there than I do in most places in the US. Even politically safer. (I know. That’s hard to believe. I’ll explain in a future missive.) The lifestyle is great and the cost of living great is less than half of what it is here in Florida. We don’t have to worry about fresh water, because the resort has nearly two dozen functioning wells. And it grows its own meat and vegetables on the property. All that is an advantage. As far as culture goes, Nicaragua’s is, in many ways, superior to what’s become of America’s. For what it lacks in wealth culture, it exceeds the US in family culture and happiness culture.

So, when I get engrossed in reading about the many ways America is falling apart – and even nearing catastrophe – I find myself thinking how perfectly wonderful it would be to have the entire Ford and Fitzgerald clans together down there one day.

Still, there is more to “escaping” America than having a second home overseas. And that’s why I was especially interested in how Thomas, who has been thinking about this subject for many years, prioritizes what he believes are the essential moves to make right now just in case Armageddon happens.

Read his essay… and let me know what you think.

Flukes, Fakes, and Statistical Uncertainties: What Happens When Physicists Fail 

I used to have, what I’d call, a conventional view of science, scientists, and scientific facts. I believed in all of them implicitly.

Then, about thirty years ago – and purely as a business decision – my partner and I decided to see if we could make a business out of publishing newsletters on natural and alternative approaches to health.

That led to three decades of shock and surprises. I changed from a naïve believer in mainstream medicine to a skeptic, critic, and sometime “denier.”

In this essay, Harry Cliff talks about “the slippery nature of probability in the pursuit of scientific discovery.”

You’ll find it to be extremely thought-provoking if you are interested in learning about particle physics. If not, I recommend you read it anyway.

Cliff explains how scientists, even the most accomplished scientists, and even with the best intentions, can make mistakes that lead to conclusions that are just plain wrong. Wrong and, sometimes, vastly damaging.

This potential for making mistakes that cause widespread damage is – it seems to me – much worse today than at any time in my life. Our culture has Balkanized into various tribes of ideological thinking, the majority of which don’t want to accept the fragility of science – especially when the advertised scientific facts correlate with their political or social belief systems.

Is College Education a Scam? 

Years ago, I argued with my Libertarian friends about the value of a college education. They saw it as a waste of time and a senseless expenditure of money. They thought this was especially true for anyone that majored in the Liberal Arts, which was my chosen field.

My argument came from my own experience. In studying literature for nearly seven years, I had developed skills that I believed were invaluable to becoming successful in life, regardless of one’s chosen occupation. Analytical thinking, for example, which is necessary for problem solving. And the ability to speak and write effectively, which is necessary for getting one’s ideas accepted in any competitive environment.

I still believe in the value of those skills, and of a Liberal Arts education in general. But back then, a degree from a public college cost less than $10,000 and a private college might have cost five or six times that much.

Today, it is much, much more expensive. And because it is so high compared to the financial benefits it provides, the cost is no longer justifiable.

So, I find myself sympathetic to the charge that a college education has become, for many, a scam.

The Jaw-Dropping Cost

According to US News & World Report, the average tuition for the 2023-2024 school year for a public college is $10,662 for in-state students, with out-of-state tuition averaging $23,630. For private colleges, the average is $42,162. That’s for one year!

The numbers are worse for elite private colleges, which have, on average, exceeded the $90,000 per year threshold. That means a family with three children could expect to shell out more than $1 million by the time their youngest child completes a four-year degree.

Millions of college students are taking out loans to finance all or part of their expenses. Many of those loans come with relatively high interest rates (6.5% to 7%), which makes it increasingly difficult for them to keep up with the payments. Some are simply giving up and declaring personal bankruptcy. Thus, in 2023, bankruptcy filings by young college graduates in the US hit an all-time high. This is happening at a very inconvenient time – just a few years post-graduation, when these young people are trying to begin their careers and their families.

You might argue that the investment in a college degree, however expensive, will eventually “pay off” because college graduates typically earn more than high school graduates. And that’s true. Male college graduates earn, on average, about $500 per week more than male high school graduates, which amounts to about $900,000 over their lifetimes. (The financial advantage of a college education for women is less, just $630,000 over a lifetime, which is largely explained by the fact that men put in, on average, about 30% more hours of work than women do.)

On the face of that, you might think that getting into $200,000 to $500,000 worth of debt is still “worth it” because of the lifetime financial advantage. But the debt figures reported are misleading. They do not include the cost of interest, which, depending on the interest rate and length of the loan, can add another 30% to the total indebtedness.

Furthermore, these are gross numbers. And like the numbers used to demonstrate a pay gap between men and women, the comparison is between the average compensation of all men and all women, without accounting for the fields that men choose to enter as compared to woman, or how many hours men work as compared to women.

When you measure the pay gap correctly – comparing like professions and like hours – you discover that there is no gap at all.

If, instead of comparing the gross numbers, we compare the average compensation of college graduates versus high school graduates with skills – such as the mechanical trades or the dangerous jobs that are predominantly done by men – it’s a different story. Here’s an example: plumbers vs. doctors.

On top of that, some of the world’s biggest companies – including Google, Apple, and Netflix – no longer require a college degree for most new employees. This, according to those businesses, is because so many young people today are able to self-educate the necessary entry skills, and then fill in the gaps after they have been hired.

The College Scam, written by Turning Point USA founder Charlie Kirk, makes this argument and many others.

“What is that piece of paper really going to do for you?” Kirk said in an interview with Fox News. “Maybe go to a community college or a tech school, take a gap year, go find a business owner that is in the profession that you might have an interest in and ask for a job, go ask for an unpaid internship.”

“The worst thing you can do,” said Kirk, “is go borrow money ahead of time when you’re not really sure what sort of skill you want to have.”

If you want to learn more about this issue, I’ve listed five links below that make additional points about why a college education, with some exceptions, may very well be overly costly and inappropriate for a large percentage of the American working population.

Click here and here and here and here and here. 

Trump’s Truth Social’s multi-million-dollar valuation defies logic, some analysts say. 

“No shit,” says Garrett Baldwin in his March 26 issue of Postcards from the Florida Republic.

He goes on…

“Is Truth Social ‘expensive,’ ‘overvalued,’ and ‘divorced from fundamentals?’

“Damn right it is, but this isn’t a ‘Trump’ thing. It’s the truth for a huge number of public companies, particularly in Wall Street’s darling tech sector.

“What you say about Truth Social, you could also say about Nvidia (NVDA), Tesla (TSLA), or pretty much any of the so-called ‘Magnificent Seven.’

“There’s a huge problem with valuation issues in this market…”

I think Garrett is right. There is a frenzy of exuberance among stock investors about certain sectors of the stock market, including cryptocurrencies and anything related to AI. At the same time, there is a massively growing interest in trading – even day trading – that is making me and other conservative investors nervous.

You can read the rest of what he says here

Biden’s Dangerous Game at the UN 

In the United Nations last week, the Biden administration softened its support of Israel once again – this time by dropping its threat to veto a resolution calling for “an immediate ceasefire [in Gaza] for the month of Ramadan leading to a lasting sustainable ceasefire” without requiring a release of hostages.

If you know anything about the UN, you know that it has a long history of hostility to Israel. It is hardly the venue where the US should get involved when it comes to its most important ally in the Mideast.

As stated in a recent WSJ editorial:

Mr. Biden’s public criticism and distancing from Israel signals to other nations that they can go even further and the US likely won’t oppose it. Will he condemn Canada’s grandstanding decision this week to stop selling arms to Israel? Crickets from the White House so far. The President’s fading support for Israel is a message to all American allies that the US can’t be trusted if their cause runs afoul of the Democratic Party’s left wing.

Read more here.

The Connection Between Music and Numbers 

The company I have worked with for nearly 30 years employs dozens of very good financial analysts. Some of them are technical. Some are fundamental. Some follow trends. Some follow momentum. And some follow large, macro-economic events.

One thing that has struck me is that many of them are keenly interested in music. It’s generally known that there is a relationship between music and numbers, and maybe that explains this. If it does, one would think that there is a common denominator in the music they like. But there is none. The range is wide and the preferences diverse.

When they talk about their preferences, I am always interested in the music they love that I don’t even know.

Here, Garrett Baldwin, one of my new favorite analysts, writes about some of his favorites.

Reminder: As I mentioned on Friday, I realize that my weekly posts have become quite long – maybe too long for some readers. So though I’ll continue to publish a full issue once a week, I’ll occasionally be sending you these “Just One Thing” pieces – short bits that, in my humble opinion, merit a few minutes of your time.

Today’s piece is about a threat that is very big, and very real, and very serious. A threat that politicians and the media on both sides are almost completely ignoring. 

Biden? Trump? It Doesn’t Matter: 
When the Next President Takes Office, He Will Be Facing an Economic Crisis Greater Than Any Before 

“It took Uncle Sam 232 years to accumulate its first $10 trillion in debt, nine years to accumulate its second, and five years to reach its third.” – Jason DeSena Trennert of Strategas, writing to his clients on March 8.

In this short but persuasive essay published in the WSJ on March 9, James Freeman argues that it looks like a mathematical certainty that the huge debt the US has taken on over the past 14 years will ruin the American economy sometime during the next presidential term. The only solution, he says, may be to follow a plan that Calvin Coolidge, who was even older than Biden or Trump, followed in the early 1920s to allow American enterprise to save the country.

Read Time: 6 minutes
Click here.

I know the weekly posts are quite long. I’ll shorten them up a bit by posting some of the briefs by themselves on other days. Today I’m sending you a short explanation of how the brain keeps itself healthy and 4 things you can do to help your brain keep your thinking clear and your mental energy at maximum capacity all day.

Brain Health 

Watch this (from TS): “An excellent, brief scientific explanation of the primary brain health factors and what we can do for them.”